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The Effects of Fiscal Policy in New Zealand: Evidence from a VAR Model with Debt Constraints

Publication Details

  • The Effects of Fiscal Policy in New Zealand: Evidence from a VAR Model with Debt Constraints
  • Published: 30 Jan 2013
  • Authors: Parkyn, Oscar; Vehbi, Tugrul
  • Pages: vii,39
  • ISBN: 978-0-478-39694-2 (Online)
  • Pub. type: Working Papers
  • Copyright: © Crown Copyright
  • JEL Classification: C32; E32; E62
 

The Effects of Fiscal Policy in New Zealand: Evidence from a VAR Model with Debt Constraints

Published 31 Jan 2013
Page updated 27 Feb 2013

Authors: Oscar Parkyn and Tugrul Vehbi

Abstract

This paper investigates the macroeconomic effects of fiscal policy in New Zealand using a structural Vector Autoregression (SVAR) model. The model is the five-variable structural vector autoregression (SVAR) framework proposed by Blanchard and Perotti (2005), further augmented to allow for the possibility that taxes, spending and interest rates might respond to the level of the debt over time. We examine the dynamic responses of output, inflation and the interest rate to changes in government spending and revenues and analyze the contribution of shocks to New Zealand's business cycle for the period 1983Q1-2010Q2. We find that the effects of government expenditure shocks in New Zealand appear to be positive but small in the short-run at the cost of higher interest rates and lower output in the medium to long-run. The sign of the effects of tax policy changes are less clear cut, but again the effects on GDP appear similarly modest. Past fiscal policy is analysed through a historical decomposition of the shocks in the model. This suggests that discretionary fiscal policy has had a generally pro-cyclical impact on GDP over the last fifteen years, and a material impact on the real long-term interest rate. A fiscal expansion has a positive but limited impact on inflation.

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Contents

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Executive Summary

1 Introduction

2 The rationale for including the IGBC

3 Model and data

4 Empirical results

5 Fiscal policy and the business cycle

6 Robustness checks and diagnostics

7 Conclusion

8 References

Appendix A

twp13-02.pdf (1,227 KB) pp.(i),ii-vii,1-39

Acknowledgements

The authors would like to thank the reviewers Andrew Coleman, Mario DiMaio, David Fielding and Renee Fry for their helpful comments and suggestions. We would also like to thank Peter Mawson, Christie Smith, James Graham, Christopher Ball and the participants at the Treasury and RBNZ seminars for their helpful comments on an earlier draft. Oscar Parkyn is currently on leave from the New Zealand Treasury.

Disclaimer

The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.

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